RF Industries, Ltd. (NASDAQ:RFIL) Q1 2024 Earnings Call Transcript
RF Industries, Ltd. (NASDAQ:RFIL) Q1 2024 Earnings Call Transcript March 18, 2024
RF Industries, Ltd. beats earnings expectations. Reported EPS is $-0.00013, expectations were $-0.06. RF Industries, Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greeting, and welcome to the RF Industries First Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for RF Industries. Margaret, you may begin.
Margaret Boyce: Thank you, Paul and welcome everyone to RF Industries first quarter fiscal 2024 earnings conference call. With me on today's call are RF Industries CEO, Rob Dawson; and President and Chief Operating Officer, Ray Bibisi, and CFO Peter Yin. Before I turn the call over to Rob and Peter, I'd like to cover a few quick items. We issued our Q1 earnings release after market today. That release is available on our website at rfindustries.com. I'd like to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.
When used, the words anticipate, believe, expect, intend, future, and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward looking statements.
Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our GAAP and non-GAAP reporting. With that said, I'll now turn the conference over to CEO, Rob Dawson. Rob, please go ahead.
Rob Dawson: Thank you, Margaret. Welcome to our first quarter fiscal 2024 conference call. I also want to welcome Ray Bibisi’s participation in our call. Recently promoted to President, Ray will play a key role in shaping the next generation of our business strategy and operations, and as such will be a valuable addition to our quarterly calls. For the first quarter, we reported net sales of $13.5 million down 27% year-over-year. While the first quarter has always been our seasonally slowest period, sales were lower than anticipated largely due to more than $2 million of customer shipments and orders that were delayed in the quarter. Importantly, these orders were not canceled and we expect they will be shipped over the next few quarters.
Fortunately, our lower cost structure helped us weather this rough period. When the market recovers, our cost reduction initiatives will yield even greater benefit and help us return to profitable growth. Turning to the overall market. It feels like the ice might be thawing on the low CapEx spend and sluggish activity we experienced for over a year. We're finally starting to see some early signs of reversal from the CapEx downturn that made fiscal 2023 so challenging. As a welcome relief from the dramatic 17% decline in CapEx spending last year, telecom companies guidance for 2024 indicated a CapEx spend increase of up to 5%, and we're seeing this reflected in our business. Important to RFI, more of the 2024 CapEx is related to densification of wireless networks, which aligns nicely with our expanded product offering.
We're encouraged that many projects, which have been in the sales pipeline for several quarters, begin to convert began to convert into purchase orders in February. Even better, this increase in new orders is primarily high value products like our DAC thermal cooling solutions and small cell shrouds that are being purchased by multiple customers in the Tier 1 wireless carrier ecosystem. This has led to a substantial increase in our quarterly backlog, which now stands at $19.3 million up $3.1 million compared to January 31. The progress we made in 2023 to become a leaner and more efficient operation will have a meaningful impact on profitability as this carrier CapEx spending normalizes and our top line growth resumes. We believe this recovery will be gradual, but has staying power.
Our backlog growth is comprised of multiple orders across a variety of customers and diverse geographies, not just one large order that's moving the needle. With several customers, we have signed long-term master agreements. This means that as long as we continue to execute, we'll remain part of their build plans, not just for 2024, but for the long-term. One customer in particular is beginning the first phase of a multiyear program of 5G deployment and infrastructure updates. With a master agreement in place with this customer, we're optimistic this will result in repeatable business for RFI. We have also positioned RFI to benefit from diversification that isn't CapEx and end market specific. It's important to know that a portion of our products and solutions align well with operating and maintenance budgets versus CapEx. We believe that solutions like our DAC thermal cooling systems are helping us smooth out the peaks and valleys of carrier CapEx by addressing annual updates and upgrades that are part of a carrier’s maintenance budget.
We've been working hard to successfully build strong relationships and a greater presence with our carrier customers and capturing some of their maintenance budget is another source of funding separate from CapEx projects. It's also important to note that last year, 57% of our sales came from diverse end markets outside of wireless carrier applications, such as manufacturing, public safety, energy, hospitality, education and medical. In addition, we're continuing to explore opportunities with new customer segments, including cable companies, wireline telecom carriers and industrial markets that could develop into meaningful business over time. As I've said before, we felt strongly that our wireless carrier customers could only stay on sidelines for so long.
To stay competitive, they need to continuously improve the telecom infrastructure to meet customers' expectations for speed and coverage. Not only are they focused on the 4G and 5G macro towers, but also on network densification. To meet both new and pent-up demand in the telecom market, we made significant investments in our integrated systems product line and can now offer a broad selection of high-quality interconnect products and next-generation integrated systems. This positions us to gain a larger percentage of our customers bill of materials by having the leading-edge products they need for key applications. In addition to expanding our portfolio of high-value products, over the last year, we executed our plan to control costs and drive further synergies by consolidating our facilities.
While the work we did in 2023 reduced our annual expenses by $2.5 million, we have other initiatives underway to potentially reduce annual expenses by another $3 million by the end of fiscal year 2024. Ray will provide more details during his remarks. In 2023, we accomplished a great deal through the hard work and dedication of our outstanding team. And Ray as Chief Operating Officer, was very instrumental in achieving this progress. Recognizing his leadership in February, we promoted him to President and Chief Operation Officer. This promotion expands his leadership role at RFI beyond operations to include greater oversight on our go-to-market strategies. I'm confident that Ray will make significant contributions to shaping our business strategy, go-to-market and operations for the next phase of our strategic plan.
Looking ahead to 2024, we're optimistic about our future prospects. We have a strong competitive position with a highly attractive product portfolio, a capital-light business model and substantial operating leverage. As you've heard me say before, as capital expenditures picked up, we see significant leverage in our P&L that can have a favorable impact on gross margins, either from higher sales, a better product mix, a better product mix shift or both. Plus, as we reduce expenses, any incremental sales should flow to the bottom line. With what we know today, we expect Q2 sales to increase sequentially over Q1, as we begin to benefit from the substantial new order flow that I discussed earlier. I want to thank our employees who worked diligently to improve our operations and set the company up for future success.
I also want to thank our shareholders who have been patient through the downturn. We appreciate all of your support. I'll now turn the call over to Ray Bibisi to speak about our operations. Ray?
Ray Bibisi : Thank you, Rob. I'm truly honored to assume the role of President of RF Industries and excited to speak with you today about the opportunities that lie ahead. In my capacity, I will be leading RFI's sales, product management, engineering and operations teams across all business units and product areas. Our goal is to closely align these teams with our go-to-market strategy that will facilitate enhanced cross-selling of our diverse portfolio and solutions. This strategic alignment is designed to establish a more cohesive and efficient organizational structure that will help us capitalize on significant market opportunities. I am confident that fostering greater integration within our market-facing team will give us a competitive edge as we pursue these opportunities.
As mentioned by Rob earlier, our initiative to drive further cost reductions will continue through 2024. We see opportunities for improvement in several areas such as direct material, facilities and equipment, product design and development, along with the benefits of applying lean principles company-wide to improve operational efficiencies. In addition to our ongoing cost reduction initiative, we have organized the Tiger Team focused on cash generation. While this initiative will examine several best practices to strengthen our business, its immediate priority will focus on minimizing excess and obsolete inventory. The potential benefits from both cost reduction and cash generation programs will enhance our financial strength of our organization.
Furthermore, I am very excited about the collaborative spirit and enthusiasm of my new team. Together, we've engaged in discussions around sales strategy, market diversification, market share as well as product road map and rationalization. We are totally aligned in maximizing the opportunities ahead that will contribute to a bright future for RFI. It's an exciting time for our company. And with that, I will now turn it over to Peter to discuss our financial results. Peter?
Peter Yin: Thank you, Ray, and good afternoon, everyone. As Rob mentioned, our first quarter results were lower than we expected. However, we are excited to see spending improving and having a positive impact on our backlog. First quarter sales were $13.5 million a decrease of $4.9 million or 27% decrease year-over-year and down 15% on a sequential basis. First quarter gross profit margin decreased to 24.5% from 27.7% year-over-year. The 320 basis point decrease reflected the impact of lower sales and less leverage to cover certain fixed costs. First quarter operating loss was $2.1 million compared to an operating loss of $1.2 million in the prior year period. The operating loss was primarily due to lower sales volume and lower contribution from higher-margin products, offset by lower operating expenses in the first quarter of 2024.
Our net loss was $1.4 million or $0.13 per diluted share and our non-GAAP net loss was $590,000 or $0.06 per diluted share compared to a net loss of $1.2 million or $0.11 per diluted share and a non-GAAP net loss of $25,000 or $0.00 per diluted share for Q1 2023. First quarter adjusted EBITDA was negative $1.1 million compared to positive adjusted EBITDA of $78,000 in Q1 2023. Moving to the balance sheet. As of January 31, we had a total of $4.5 million of cash and cash equivalents and have working capital of $21.6 million and a current ratio of approximately 2.9:1, with current assets of $32.9 million and current liabilities of $11.3 million. As of July 31, we borrowed $12.5 million under our term loan and $500,000 from the revolving credit facility.
Related to the credit facility, as you saw in the third amendment filed at the end of February, we have been working over the last several months to ensure we have access to liquidity and flexibility needed to support the recovery of our business. As of today, we have refinanced the term loan that was put in place in 2022 with a new asset-based revolver with a new lender. This revolver will support our next phase while giving us the working capital flexibility to handle potentially uneven deployments in customer orders. Our inventory was $18 million, down from $18.7 million last year. The decrease in inventory reflected our continued rationalization and rightsizing of our inventory to address the lower demand level we experienced in 2023. We believe our current inventory level supports our strategic business model of inventory availability and we continue to manage this closely as we expect to see increased demand in 2024 and as CapEx spending gradually normalizes over the coming year.
Moving on, we are seeing momentum build around new business. Our backlog as of January 31 was $16.2 million, on first quarter bookings of $13.6 million. Subsequent to Q1, we've seen an increase in order flow. And as of today, our backlog currently stands at $19.3 million. As we look ahead, we're optimistic the positive trends we are seeing with our customers will continue and benefit our sales. We're excited about our opportunity to drive top line growth and generate profitability through key customer projects and higher value solutions. With that, I'll open up the call for your questions.
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